Tax Tip: Deductibility of a Charitable Contribution of Intellectual Property

Question: Is custom software that is donated to a 501(c)(3) charity deductible? What about the data that goes with the software?

Answer:

An important principle when considering the donation of intellectual property is that for the gift to be deductible, the donor must transfer all substantial rights in the intellectual property such that the donation would be considered to be a complete assignment of all rights. That is, one cannot merely let the charitable organization use the intellectual property. The organization must, for all intents an purposes own the intellectual property.

Rights in software are generally based on copyright. In general, for the donation of a copyright to be deductible, both the tangible item and all rights in the copyright must be transferred. This is referred to as an assignment, rather than a license. Software that is purchased at the store wouldn’t qualify for this treatment. Prepackaged software is generally licensed to the purchaser. Therefore the purchaser could not transfer the copyright, since the purchaser of prepackaged software most likely does not own the copyright. Additionally, there may be some limitations on the purchaser’s ability to transfer the license in the software.

Similarly, a compilation of data may be intellectual property classified as a trade secret. Similar principles would apply. That is, the donor would have to transfer the data and all rights in the trade secret and its use.

The correct deductible amount for the donation of the intellectual property is the fair market value less any gain that would have been realized if the property had been sold at its fair market value on the date of the donation.

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Comments

If you are building a custom piece of Software for a recognized IRS Non-Profit organization to donate and be able to deduct from your personal tax return, how do you determine fair market value for something that does not exist anywhere else?

Once I have donated it to the organization, can I then turn around and donate the same software I created to another recognized non-profit that could be used in the same manner?

Generally the value of a deduction based on an in-kind donation of intellectual property is limited to the lesser of the basis, that is what it cost to develop the IP, or the fair market value. But, in the case of intellectual property, the fair market value of the IP must be reduced by the gain that occurred after the creation but before the donation of the IP. Therefore the deductible amount is almost always the basis in the intellectual property being donated.

But, to answer the question about fair market value of unique IP, frequently in these types of situations a professional appraisal is helpful. Note that a professional appraisal is always required to support deductions of $5,000 or more for in-kind charitable donations.

And no, one could not turn around and donate the same software multiple times. For the donation to give rise to a deduction, all the rights in the software would have to donated. Essentially that means a complete transfer of the ownership of the software and therefore there would be no rights left to donate.

What a wonderful website Judi! My question is the same as the first post, except I wonder about the need for an appraisal. Form 8283, Section B Part I (page 4-5) says that Exceptions to the need for an appraisal include Intellectual Property as defined on Page 3. Page 3 defines Software in this category, as long as it meets your definition above (IRS 197 e3a1).

So, no appraisal seems required?

Also, the basis for the software, can it be the cost of my time to produce it, using market relevant rates?